Viewing market prices as the flaw, not the model, drove prices down

Evidence

If the discrepancy between Black-Scholes prices and market prices was seen (as Scholes persuaded Mathew Gladstein: see chapter 6) as a flaw in the market, not in the model, then adoption of the model would have had the effect of reducing prices: it would give the confidence to keep selling options, as Gladstein did, until prices dropped. To the extent that others did this (just how widespread it was isn’t clear), the availability of the Black-Scholes formula and of its associated hedging technique gave options market participants the confidence to write options at prices lower in relative terms than in previous markets. — Donald MacKenzie, An Engine, Not a Camera, 1157

Categorization

• XREF: A concrete instance of the model-over-market epistemic stance — echoes chapter 6’s Scholes/Gladstein episode and the broader sociology-of-finance literature on how traders decide which side of a price discrepancy to trust. — connects to: Market beliefs about a fund’s portfolio can be wrong yet still drive fire-sale pricing. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1061